Exxaro Resources Limited (OTCPK:EXXAF) Q2 2022 Earnings Conference Call August 18, 2022 4:00 AM ET
Company Participants
Mzila Isaac Mthenjane – Executive Head, Strategy and Corporate Affairs
Nombasa Tsengwa – Chief Executive officer
Kgabi Masia – Managing Director, Minerals
Pieter Adriaan Koppeschaar – Finance Director
Sakkie Swanepoel – Group Manager of Marketing & Logistics
Mvuleni Geoffery Qhena – Chairman
Conference Call Participants
Thabang Thlaku – SBG Securities
Brian Morgan – RMB Morgan Stanley
Shilan Modi – HSBC
Mzila Isaac Mthenjane
Good morning, ladies and gentlemen. My name is Mzila Mthenjane, and I’m the Executive Head for Stakeholder Affairs at Exxaro. It’s our pleasure, and hopefully you’ll see why later, for me to welcome you today to our results presentation for the first six months of our financial year.
Let me welcome those who are joining us online, on webcast as well as Chorus Call. And I believe our Chairman and one of our — Mr. Geoff Qhena, as well as one of our directors is also joining us online. And also always pleasing to welcome our pensioners and also the newly joined member Mr. Mxolisi Mgojo, our Former CEO. Thank you very much for the continued support.
Maybe before we start, just for those present in this room, some safety. I will not — and we have not planned for an emergency. So should you hear an alarm it is — it means that something is wrong and we will need to make sure that we exit this place without a rush. There will be people who will guide you to a place, where you’ll then gather. The ablution facilities — I think most of you have been here before — are behind this auditorium to the right when you step out the doors.
So just perhaps for context. We’ve just finished the online media interviews, and it was quite interesting some of the expressions that we were hearing. And for a coal company, for somebody to say, the coal gods are smiling at you, it’s actually been quite a very positive expression. And then, Price bonanza, how long is that going to last? And then I think my favorite one is a ravenous market and demand.
So that’s really been the theme and the characteristic of the commodity, and specifically, the coal market. But I think for Exxaro, it has been more than that. And you’ll see when we present particularly on the cost that — when it comes to cost performance, what I’ve seen from what the analysts have been reporting the issue of the margin pinch. It’s quite easy for companies to forget about cost management and rely on prices, and then you find a squeeze on the margins.
But I think cost performance is also an acknowledgment for Team Exxaro. And for me, from where I’m sitting today, just to say thank you very much for the safe performance and the excellent cost that we’ve achieved.
And so with that context, there could never have been a better time to take to the helm. And we have our CEO, Dr. Nombasa Tsengwa, who took over from Mr. Mxolisi Mgojo on the 1st of August. And so, it gives me great pleasure to hand over to you, Dr. Tsengwa, to take us through the first part of the presentation. And then you’ll be followed by the rest of the team. Thank you very much.
Nombasa Tsengwa, who took over from Mr. Mxolisi Mgojo on the 1st of August. And so it gives me a great pleasure to hand over to you, Dr. Tsengwa, and to take us through the first part of the presentation. And then you’ll be followed by the rest of the team. Thank you very much.
Nombasa Tsengwa
Thank you, Mzila. From this end of the presentation, good morning, ladies and gentlemen, and greetings to you all. Special greetings to our Non-Executive Directors joining us here today, and I can see some of them sitting right in front of me. And last but not least, to the well rested members of the pensioner club.
Looking back at the first half of 2022, I’m excited to share our pleasing set of results with you this morning. The Russia-Ukraine war is a human tragedy that came at a time when the rest of the world, especially vulnerable economies like ours, have struggled to recover from the impact of COVID-19. Now worsened by the subsequent European energy crisis. With winter approaching, European governments have implemented unprecedented measures to ensure adequate energy supplies, such as thermal coal in the event that Russian gas supply seizes.
Germany’s parliament recently passed an energy security bill that allows utilities to reintroduce and extend the life of coal-fired power plants. This has resulted in renewed thermal coal demand in Europe last seen in 1990 with a significant increase in exports from South Africa to Europe. These export volumes rose from 1.7 million tonnes in the second half of last year to 4.5 million tonnes in the first half of this year. This is an opportunity enabled by our early value strategy, which optimizes high-quality coal delivered to alleviate the European energy security gap. Kgabi will talk more about this.
The global economic impact to commodity markets has been mixed and volatile throughout our reporting period, marked by a series of market shocks, such as the runaway coal prices we’ve seen during the half — which is the first of this — the first half of this year. Furthermore, weak economic sentiment started to weigh heavily on commodity markets, including iron ore, which is key to our portfolio in respect of earnings. Nevertheless, for Exxaro, the steady decline in iron ore prices was complemented by the strong thermal coal price performance.
Inflationary pressures due to elevated Brent crude oil prices, shipping costs, supply chain disruptions, et cetera, resulted in higher production and distribution costs across our industry. And we are proud to share that our operational efficiency successfully cushioned us against this impact.
Now looking at ESG. ESG to us goes beyond compliance. It is an integral part of our daily system that we uphold right across this organization. We engage more now on ESG than we did historically, having recently optimized and created the execution governance structure of executives to drive the meaningful and sustainable ESG outcomes.
On safety performance. It is a key highlight of this reporting period, having achieved a record five years and five months of being fatality free. The sterling safety performance of the last six months and five — of the last five years and five months, is a demonstration of a truly committed team of men and women at our operations. We regrettably woke up to shocking and disappointing news, however, of a fatal accident at our Belfast mine three days ago, where our contractor, Mr. Matthews Manalo, was run over by a hoe truck at the parking lot. We still await the outcomes of that investigation. We must continue to choose safety in our workplaces, and we send our deepest condolences to the family, colleagues and friends of Matthews.
We are proud to have yet another opportunity to contribute towards preserving Africa’s biodiversity by relocating our 19 white rhinos to the Zinave Game Reserve in Mozambique in June of this year. We believe that strengthening of the Big 5 is not only critical for biodiversity enrichment and maintaining the integrity of the ecosystem where these animals thrive, but also a contribution to the much needed socioeconomic impact from sustainable tourism in our region.
On our recently rehabilitated Belfast wetland, we are excited to see a vast increase in wetland species and downstream benefits to surrounding communities, justifying the ZAR23.9 million we allocated to this project. On economic and social development, our commitment to relieve our communities from poverty has been boosted by an expenditure of ZAR699 million across four provinces through our SLP and ESG initiatives.
Through these initiatives, part of housing in Limpopo, Eastern Cape and Mpumalanga have benefited, which has resulted in 600 community members benefiting directly. We also have other key governance processes such as capital allocation, which we’ll speak about later. Also in line with reducing internal red tape, we have streamlined our procurement processes. We have strengthened the capability of our Board with additional skills in the ESG sphere, including further gender diversity. To further demonstrate our commitment to achieve a sustainable ESG performance, we are proud to have maintained an industry-leading position on the FTSE Russell ESG Index.
Now moving on to operations. The business has displayed resilience. Our coal business delivered 1% production increase despite logistics challenges we’ve experienced, which impacted negatively on our export sales, which declined by 27%. We are very proud of this operational achievement, and we commend the team on achieving this performance fatality free. As the previous guidance, we achieved our cost performance target well below mining inflation of 11.6%, a truly impressive performance by the coal team given the prevailing global inflationary pressures and rising distribution costs. I congratulate our operations and marketing teams for this achievement, and encourage them to continue to innovate around challenges rather than throwing money at them during tough times.
The performance of the energy business is within the seasonal trend ranges. The wind energy delivered decreased by 22% during the first half of this year compared to the second half of last year. Whilst we are experiencing a low wind factor, the team managed to maintain the availability of our wind turbines at 97.4% during the first half of the year compared to contracted availability of 97%. I’d like to congratulate our energy team for a speedy registration by NERSA of our 80 megawatts Lephalale Solar Project at GG. This is important — this is an important milestone as it marks progress towards further growth of our energy business.
As I have already mentioned, despite operating in a high inflationary environment, cost containment and a high price realization on our product mix saved the day. We continue to create shareholder value. As you can see, our early value strategy added more high-quality coal and core EBITDA increased by 67% from the previous half on the back of record revenue levels. We delivered record headline earnings for the period of ZAR34.26 per share, which is 75% higher compared to the last six months of last year.
This record headline earnings performance includes a contribution from SIOC and Mafube JV equity interest. We achieved an annualized return on capital employed of 39%. This achievement is attributable not only to the strong coal price performance, but also to our efforts on efficient capital deployment and cost management. These will remain critical focus areas as we embark on our growth journey ahead. I am certain that you will agree with me that these half year results have been truly outstanding, especially considering the global economic uncertainty behind and ahead of us.
Having said that, it is my pleasure to announce the dividend as declared by the Board of ZAR15.93 per share — those are the pensioners I can see — based on our dividend policy, which Koppes will elaborate on a bit later.
Now I give over to Kgabi.
Kgabi Masia
Thank you, Nombasa. It is a very exciting period, and I feel privileged to present my first operational performance report as MD of Minerals. By no means has it been an easy introductory six months as we have encountered our fair share of challenges. As mentioned earlier by Dr. Nombasa, we unfortunately had a fatality at one of our operation, and our thoughts and prayers are with the family of Matthews, friends and colleagues. I’d like to commend the Minerals’ team, who responded to the challenges encountered, and we managed to achieve the following exceptional results.
We remained 65 months at the end of August, where we’ve achieved fatality free. The safety and health of our employees remains a priority. We had operational performance which is great. And we’ll touch on that later. I mean, we’ve managed to maintain our cost despite all the inflationary pressures. We are consistently focusing on creating value through our early value strategy and our capital excellence journey.
I will go through the details of our performance. What I’ll touch on is our integrated self-health and environment. And I think we have a slight — who just jumped on the — apologies for that. On this dashboard, what we’d like to share is that the team has done very well. And if you look at the number of measures, which I’ll be touching on. On the health side, we’ve managed to lower our lost-time-injury frequency rate by 57%, which is 50% of our target of 0.06. And we’ve mentioned earlier that the team has gone 65 months without any fatality. We still acknowledge the fatal which we’ve had, as we’ve mentioned earlier. But for us, we will reflect on this and we’ll learn on it. We’d like to congratulate our teams for continuing to drive zero harm and demonstrating that Khetha Ukuphepha, which is true safety, is the best trait. We are also pleased to report a decrease of 57% to our TRIF.
And on the health side, is where we are also thankful that we’ve never had any COVID-related deaths in the first six months. Thirdly — and we need to acknowledge this, that 37 of our employees have lost their lives due to COVID in the last two years. 89% of our employees and contractors are vaccinated and we’ve exceeded the mining industry target of 80%. And we continue to support our booster campaigns. Our occupational health incident frequency rate is below target as we continue to focus on initiatives on the health space. And we’ve reduced the number of TB cases in the business.
On the environmental front, I’ll touch on a few metrics. If one looks at the rehab, we’ve improved our rehab by 1% and we will continue with this performance going forward into the second half of the financial year. Exxaro has had no Level 1 — I mean, Level 2 and Level 3 incidents, which are major incidents. But what is important is that we’re encouraging reporting. You will see that we’ve had 15 Level 1 incidents, which are minor incidents. This is a continuation on the good performance of the second half of financial year ’21. Our carbon intensity has decreased by 0.7%, mainly as a result of energy efficiencies designed to reduce diesel, especially at our flagship Grootegeluk mine. Our water intensity has reduced significantly by 18.7%, compared to the previous month as end of June 2021. This was due to efficient measures at all our operations, where we’re focusing on water efficiency.
I’ll then move into the volume slide. Despite the divestment of our Exxaro Coal Central Complex, which we call ECC, we’ve managed to improve our overall production by 1%. We’ve ramped our production at GG6 at Grootegeluk, as been indicated on the table, that we improved by 1%. And if I look at the sales, we’ve reduced that by 4%. We’ve touched on earlier and Dr. Nombasa has also touched on that, that we’ve had logistical challenges. However, we’ve managed to respond to that. We’ve mitigated the operational impact by utilizing alternative channels, selling products to export and local markets. The biggest shift is — on your export numbers, there’s a decrease of 27%, which is almost 1 million tonnes. That, however, we’ve mitigated by placing products in the domestic market. And that has reflected in the domestic market increasing by 1%. And the total net decrease of the sales is about 5%.
In the second half, we’re focusing to increase our production by 6% and our sales will increase by 11%. And how are we going to achieve that? There will be for this 2% upliftment in production at Mpumalanga, driven mainly by the market, especially at our Leeuwpan and Belfast operations. We’ll send coal through multiple channels and targeting people, who have especially coal — because if we sell coal, we must be able to export for that coal. We’ll also sell more coal into the domestic market. What I’d like to mention is that these options come at an additional cost, which I will touch on, on later slides.
Our GG6 ramp-up improves product quality and also increased our total production by 1%. Our Matla volumes will decrease, however, by 3%. That is due to the challenging geological conditions in the mine to short-haul section. We expect to further benefit from our logistics focus, enabling us to increase our exports from 2.5 million tonnes to 3.1 million tonnes. This is a significant increase of about 24%. And we’ll achieve this through channeling coal through multiple ports, sending coal through Maputo or Richard Bay and utilizing a lot of tracking. The logistics constraint remains our biggest challenge and our number one priority and to ensure that we continue with our production. We continue to engage with Transnet and we’re meeting with them regularly to address this challenge.
If I move into the export market. Dr. Nombasa has touched the Russian-Ukraine war. Looking at the top right-hand corner — I know this is a busy slide — you’ll see that the material flow has been impacted by the Russian and Ukraine war. The destination of our products have moved significantly into Europe. Maybe I’ll touch into India. India market was a bit depressed because of the higher coal prices. But however, we’ve seen a strong demand of our coal from Europe, and we continue to get more interest from our Pacific customers.
We saw strong demand from our suite of products as we produced a range of products from RB1, RB2 and RB3 and RB4. Exxaro was successful in placing volumes. If one compares with the second half of financial year ’21, we only sent 6% of the material to Europe and we exponentially increased that to 32% in the first half of this financial year, leaving us with a well-diversified and robust market positioning. This was made possible by our early value strategy and our robust portfolio. We have what we call the market to resource, which also helps us to optimize in terms of sending coal to the market.
I’ll touch on the bottom left-hand chart, which indicates our product mix. In the second half of financial year ’21, we’ve only had 34% of our coal made of RB1. That has increased in this first half of this financial year to 51%. And looking forward, that increases further to 58%.
At the bottom right-hand chart, which focuses on price, we’ve witnessed record high prices on the back of high oil and gas prices, as indicated earlier by Dr. Nombasa. And also, this is supported mainly by the security concerns, most notably in Europe. Our robustness and our diverse product portfolio, coupled with market to resource optimization initiatives enabled us to increase our price realized — this is important — by 18%. If one looks at the second half of financial year ’21, our — the price achieved was at 77%. And we’ve managed to increase that to 95%. And this is across all the suite of the products we’re exporting. The TFR performance levels continue to make for a challenging environment, and our focus is on finding solutions to get product to market, whether domestic or through other export channels. We are prioritizing value over volume.
If I move into the cost performance, we’ve had a very outstanding cost performance. I mean, if we look at where the inflation is sitting, we’re indicating a number of 11.6%. And we’ve also looked at — that inflation is also — above 12% now. But at Exxaro, we’ve managed to maintain our cash costs at only 4.7%. This is based on our improvement initiatives and operational efficiency, price. Notwithstanding the lower increase of 4.7%, this resulted in a ZAR70 per tonne impact on operational costs. We, however, saved a potential ZAR25 per tonne impact based on the 11.6% coal mining inflation.
We had good success in containing our cost with the major contributors as follows: we’ve decreased our contractor cost by 20%, saving ZAR11 per tonne based on improvement projects. We also increased volumes, impacting positively on employing cost of ZAR9 per tonne. Earlier on, we did mention that our overall production was up by 1%. So that also helps in terms of diluting the costs.
The above savings were offset by somewhat the following increases: the fuel, which is also impacting all of us in the room. The inflation on fuel was 24.4% above inflation, increasing the overall cost by ZAR10 per tonne. The timing on normal maintenance cycles cost, another 9% increase in the cost. The explosive-linked material, ammonia, was up by 38%, which also added another ZAR3 per tonne to our cost.
Our ability to export additional volumes, as we’ve mentioned earlier, on the logistics channel, we’re moving coal through multiple ports, that comes at almost double our normal distribution costs. We continuously evaluate each case differently, because it needs to make financial sense for us, where are we going to export, through which channel. Notwithstanding the inflation pressures, we still aim to remain below the coal mining inflation going forward.
Riaan will further unpack the absolute cost movements and deal with the non-operational EBITDA — operational groupings in the EBITDA slide. I’d like to touch on our disciplined capital execution. We expect our capital spend to be 1% lower than guidance as provided end of June 2020. This is mainly driven by our decrease in the sustaining capital, which I’ll touch on later.
On the expansion capital, which consists mainly of the GG6 project, we remain to spend the ZAR5.7 billion as previously guided. And GG6 is currently being ramped up. On the sustaining CapEx, we expect our spend to be 1% lower than previously guided. This is mainly due to timing of our projects, which are the backfill project and the replacement of the mining equipment project. We will sustain our business at an average of ZAR2 billion to ZAR2.5 billion per year in real terms, as previously advised. This is important that we continue to service our markets and to execute our early value strategy.
We continue to exercise capital discipline and enhance it through our capital excellence journey, which we’ve launched in the first half of this financial year, ensuring that we drive value through our investments. And I’d like to thank our operational teams, which consists also of our marketing teams, for their commitment and the good performance.
I will now hand over to Riaan. Thank you.
Pieter Adriaan Koppeschaar
Good morning, ladies and gentlemen. It’s a pleasure to present the results for the six months period ending 30 June, 2022. The results will be compared to the six months period ending 31 December, 2021. The IFRS results are adjusted with non-core items, consisting of headline earnings adjustments and other items deemed to be non-core. There were no additional non-core adjustments in the current reporting period. Further details of the adjustments are included in the backup slide.
So on the first slide, the high-level overview of the core results highlights the difference between our own managed operations depicted at the top and income from our equity-accounted investments at the bottom. Revenue and EBITDA will be unpacked in the next two slides.
So the contribution from our non-managed operations showed a significant increase with equity income increasing 30% to ZAR4.1 billion, mainly as a result of the strong performance of our investments in the Mafube joint venture as well as Sishen Iron Ore Company. This translated into core headline earnings per share of ZAR34.26, an improvement of 75%.
On the next slide, we will look at the revenue waterfall graph. Domestic prices realized on our Eskom sales increased as contractually agreed, and we also realized higher prices in the domestic market, in line with the higher coal prices. On our exports, the higher benchmark API4 price resulted in an average price per tonne achieved of $262 a tonne, 123% higher compared to the second half of last year, and as pointed out, only a 5% discount to the benchmark API forward price.
If we look at volumes, domestic sales volumes increased in line with higher customer demand. And to mitigate the impact of the lower export volumes, we also sold more coal domestically. The decrease in export volumes as a result of the logistical challenges has already been addressed by Kgabi.
Looking at the exchange rate, the average rand-dollar spot rate was 2.5% weaker, and we achieved a realized rate of ZAR15.73 compared to ZAR14.94 in the second half of last year. On Matla, revenue from Matla decreased by ZAR37 million due to the lower recovery of CapEx from Eskom. ECC was only included for two months in the second half of last year and is therefore shown separately in the graph.
On this slide, we will look at group EBITDA. The revenue variance was already unpacked on the previous slide. We are experiencing, as pointed out, inflationary pressure with the biggest one, diesel cost increasing 24.4%, and the electricity cost 4.8% and the rest of the cost at 7.5%. Adjustments to the environmental rehabilitation liability resulted in a negative variance due to inflationary increases on the rehabilitation cost. Employee costs decreased mainly as a result of higher bonus payments to employees in line with performance targets and higher ESOP distribution in the second half of last year, not reoccurring again in the first half of this year.
The operational cost increased due to higher volumes of buy-ins from Mafube JV at the higher prices amounting to additional ZAR854 million. We also incurred additional maintenance of ZAR121 million and higher diesel consumption of ZAR190 million, and as Kgabi pointed out, higher cost of blasting of ZAR52 million. The negative variance on selling and distribution cost is due to additional road transport, demurrage and wharfage costs incurred to mitigate the impact of logistical challenges on exports. That was ZAR140 million. And higher cost incurred in line with the higher domestic sales volumes of ZAR67 million.
Stock movement in buy-ins. We had lower volumes of third-party buy-ins at lower prices and also increasing inventory buildup. The net positive ForEx variance is a combination of realized and unrealized foreign exchange differences on foreign debtors and cash balances as a result of the weakening of the exchange rate. On royalties, although the royalties expense increased in line with our higher revenue, but with lower CapEx to offset against it, it was offset by a higher recovery of royalties expense at Medupi. Included in the general bucket for coal are mainly negative fair value adjustments on funds in the environmental Rehabilitation Trust Fund.
On the next slide, we split out the revenue and EBITDA between the Waterberg and Mpumalanga operations. We are pleased to report a significant increase in EBITDA at both the Waterberg and Mpumalanga commercial operations. The increase in EBITDA at Waterberg of ZAR2.8 billion is mainly attributable to the higher revenue as a result of higher price realization of ZAR3 billion. And despite inflationary pressure, we experienced very good cost control and incurred additional distribution costs due to a portion of our export sales being evacuated by a route of ZAR48 million, higher export volumes of ZAR32 million and an increase in rail cost on the higher domestic sales volumes of ZAR67 million.
The Mpumalanga increase in EBITDA of ZAR1.4 billion is attributable to the higher revenue from the mines of ZAR2.4 billion, offset by the higher volume of buy-ins from Mafube at higher prices of ZAR834 million, as well as the inflationary pressures mentioned. All of this translated into a very healthy 49% EBITDA margin for the coal business.
If we then look at Cennergi. For the first half of this year, Cennergi generated 307 gigawatt hours of electricity. Overall performance is below our guidance due to the lower wind conditions we are experiencing. In the South African and European context, wind farms have experienced their lowest wind conditions over the past six months. Generation is anticipated to increase in the second half of this year; however, still below the historical average generation as a result of this low wind cycle.
Our equipment availability has been marginally better than the contracted levels for the six months under review. Our normalized EBITDA margins exceed 80% over the various periods, showing the consistency of earnings and cash flows underpinned through the long-term offtake agreements. The project finance debt of ZAR4.6 billion will mature over time and be fully settled in 2031. It has no recourse to the Exxaro balance sheet and is hedged through interest rate swaps at an effective rate of 12%. Hedge accounting is applied, and therefore, these hedges have limited volatility on the income statement.
Since the start of the wind farm operations in 2016, both facilities have maintained availability of 97.7% and achieved historical average capacity factors of 35% at Amakhala and 39% at Tsitsikamma. The current poor wind year has, however, negatively influenced this trend.
On this slide, we will unpack the core attributable results in more detail. Net financing costs for Exxaro, excluding Cennergi, amounted to ZAR27 million as we capitalized interest of ZAR82 million on the GG6 project. Net financing costs associated with Cennergi’s project financing was ZAR239 million.
Looking at our equity income. Mafube, our 50% JV with Thungela, recorded an equity accounted profit of ZAR756 million as a result of the higher coal prices, but partially offset by higher royalties as well as the increase in cost of diesel and explosives. The increase in equity income from SIOC to ZAR3 billion was driven mainly by higher iron ore prices, a weaker exchange rate, offset to some extent by lower volumes. Tronox consists of our 26% interest in the South African operations for only two months in 2021 before the disposal of our shareholding. The higher equity income from Black Mountain is mainly due to higher zinc, lead and copper prices.
With the share buyback concluded in 2021, the weighted average number of shares used in calculating attributable earnings per share reduced from 250 million to 242 million shares. So this resulted in core attributable earnings per share of ZAR36.26, up 75%. When we come to our cash generation and capital allocation in applying our allocation framework, we always aim for a net debt-to-EBITDA ratio of below 1.5 times, excluding project financing. So for these first six months, cash inflows totaled ZAR10.5 billion, comprising of ZAR7.5 billion from our own operations and dividends received of ZAR3.5 billion, mainly from SIOC.
In terms of our capital allocation framework, we used this to pay financing cost of ZAR300 million, sustaining our operations and support functions with capital of ZAR710 million and paying dividends of ZAR4.1 billion, consisting of a pass-through of the SIOC dividend of ZAR2.7 billion and ZAR1.4 billion from our own managed operations. We also expanded our coal operations with further CapEx of ZAR34 million. Included in the other bucket of ZAR790 million is ZAR391 million to settle vested share-based payments.
Excluding the Cennergi net debt of ZAR4.5 billion, it resulted in a closing net cash position at June of ZAR5.7 billion, resulting in an overall net debt position for the group of just over ZAR1 billion. I’m also pleased to announce that the Board has resolved to pay an interim dividend of ZAR15.93 at an overall group cover ratio of 2.2. This is a pass-through of the SIOC dividend and a cover of 2.5 times on Exxaro Group adjusted earnings.
So with that, I’d also like to thank everybody at the operations for the hard work to make these results possible; also the support functions, your efforts are appreciated; and also my finance team for all the hard work and the late nights.
With that, over to Nombasa.
Nombasa Tsengwa
Thank you, Koppes. Ladies and gents, now we will focus on our business outlook. So if we really look at our operational focus, we’re really obsessed about safety and it remains our first and foremost priority. And we commit to support all our employees to build on our sterling performance, already mentioned, despite the fatal that we’ve just experienced.
We will remain focused on lifting our employees’ collective morale and foster an environment conducive to an engaged and productive workforce. We are proud of our continued strides towards promoting diversity, equality and inclusion to make Exxaro a place that each and every one of our employees can call home. We are committed to the creation of a workplace where there are equal opportunities for all employees, a workplace that is fair, transparent and consistent in terms of application of policies and outcomes. Our operational excellence initiatives, digitalization programs and cost management drives are critical aspects of our business as they will not only enable us to remain competitive, but will also provide a soft landing against the high inflationary environment we foresee.
On the rail logistics and infrastructure front, we continue to engage with industry players, government and TFR in exploring possible long-term models and private participation to mitigate the current rail constraints. We remain committed to collaborate with Eskom to resolve the current energy crisis in our country. Our product mix with higher proportion of RB1 remains our defense now and in the future, and we’ll protect and grow this position to continue to take advantage of market conditions and cushion the impact when the market turns.
And if you look at the market volatility, and due to reasons already mentioned, we foresee strong thermal coal prices, although prices may start to moderate going into the last quarter of this year. And with commodity prices in general starting to come off peaks, coupled with inflation continuing to come through, margins are expected to come under pressure. In a high inflation, high interest rate environment, we expect that capital will become expensive, which may delay investments in the critical minerals required in the ramp-up of the green energy economy.
Going into the second half of this year, we expect continued geopolitical tension, continued European energy and security concerns and the implementation of economic sanctions. Our expectation is that these global dynamics will have a resultant impact on the complex, which is the energy complex trade flows. The implications for our operations will be continued European demand for our high CV coal, and we are ready to continue to service this market. Even though Exxaro was not severely impacted by supply chain disruptions, these disruptions are anticipated to continue in the second half of this year. And Black Swan events like COVID-19 have taught us to be agile and responsive.
So moving on to how we see ourselves positioning your business into the future. In September of last year, we announced our sustainable growth and impact strategy with an overarching ambition of achieving carbon neutrality by 2050.
And I want to say this at this point in time, because I know I’m getting this question quite a lot as I’m talking to a lot of individual interviews. The strategy that was approved in 2021 by our Board that we’ve announced to you is still intact. I was part of that process. And what we’re doing now is to gear up for execution of that strategy. And this strategy has given hope to so many of our employees and stakeholders, especially in the light of climate change risk that we’re facing and its implications to our current business.
And the strategy is quite ambitious. And with such a certain ambitious strategy in our hands, faced with various competing internal requirements and deferring shareholder interest, that had a bearing on capital. Means that to grow this business, it requires capital analysis of which investments, whether stand-alone or blended, will deliver maximum value for you, our shareholders and stakeholders. Therefore, we are reminded all the time when we allocate capital, that this is your business after all. And you will hear us say this all the time because we have that consciousness. And that every rand that we invest, must deliver value once again for you.
So we are proud to have proven our ability to create value by outperforming our value creation target of 20% in return on capital employed. We all demonstrated over the last five years that our ROCE performance consistently exceeded 25%. Furthermore, we have been listening very carefully to your comments, caution and advice regarding capital allocation over years, especially allocation associated with diversification and growth strategies. Therefore, our sustainability growth — or sustainable growth and impact strategy necessitated a new approach to capital allocation, to grow our Minerals and Energy businesses concurrently, while also fully understanding the risks and rewards associated with both legs of this business.
Our revised model will enable delivery of continued shareholder value and create sustainable resilience and a robust enough enterprise that can withstand dynamic market shifts. This model also facilitates a coherent yet robust and fair decision-making between competing business investments, interests, and ensures alignment with our strategic intent, complex. A tough problem to have, having to balance all of this. And it considered two main criteria, namely strategic fit and investment pacing.
So let me start talking to the strategic fit. The criteria of the fit includes metrics to evaluate financial and market performance capability alignment, ESG performance and diversification of product, geography and customers. The second criteria of pacing prioritizes timing of investment decisions, and it considers factors such as time to earnings, organizational readiness and stakeholder considerations to ensure timeliness realization of value.
Central to value creation is the prudent allocation of stay in business capital that Kgabi and Mellis are leading. Very interesting work that the team is doing there. Pacing program demonstrates our vigilance to optimizing the use of our financial resources to create sustainable value. Having applied our revised capital allocation model to our growth needs from this two legs of our business, our growth strategy is in line with our ambitions, but we could see the pressure on the balance sheet and the recent market volatility, such as dip in commodity pricing, escalating inflation, threat to the cost of borrowing, uncertainty of TFR performance. Therefore, we are really compelled to manage our cash flow prudently.
Now regarding our aspiration to reach carbon neutrality by 2050, we believe that our core business and the energy business must work in tandem to achieve this. So if you look at this graph, we show our high-level medium-term commitments to reduce Scope 1 and Scope 2 carbon emissions from our operations by 43% in 2026. And we believe we can achieve this, if you look at what we’ve already offloaded from our operations, which is the divestment of ECC operations last September; in addition to our solar PV plant in Lephalale that is underway, which is also going to help us a lot; and various pollution prevention initiatives, which we’ve already budgeted for over the next five years. Additional generation capacity we’re building at Cennergi will be used to decarbonize other third parties in the mining industry and beyond.
It is therefore worth mentioning that a project management office to monitor the execution of this plan is led by an executive, Mr. Vedi, reporting on a regular basis on key performance indicators agreed upon upfront with our Board. The market disciplinary team contributing to these results also identified more opportunities, as listed on this slide, to further take our carbon from our operations beyond the 2026 time line. So that work will unfold.
We are still consulting our stakeholders further to look at the Scope 3 issue. Because we know that for the Scope 3 perspective, almost 98% — as long as I say, it’s 99%, of our Scope 3 or all of our emissions for that matter are in the Scope 3 environment, and they belong to Eskom. So that is something that has got to be managed very carefully. We’ve got to partner with Eskom, and obviously look at our other suppliers. And we believe that a plan by the end of the second half of next year could be on the table, but that work, as I said, is foreseen and managed by a few executives.
So we are in a — if you look at now how we perceive the role of our energy business, not just in our lives, also in South Africa, we are in an energy crisis in South Africa. And broadly speaking, this is not just us and the rest of the world. We have built a renewable energy business, which is well positioned to contribute significantly to addressing an impending electricity deficit. The economic growth of the country and social progress depends on this energy security. And you are aware that we’ve installed 229 megawatts of wind energy, which is a strong base from which we will build and grow this business.
Late last year, we communicated a 3 gigawatt growth target for 2030. However, with the rapid and positive policy developments in this sector today in South Africa, we have re-paced our growth to 1.6 gigawatts by 2030 and reprioritize our immediate investment and development in South Africa. We are proud to announce that in our endeavor to grow this business, Cennergi has concluded a joint development agreement with ENERTRAG South Africa to collaborate on the development and execution of renewable energy products for the Mpumalanga region on an exclusive basis.
The formation of this partnership forms part of our execution of the energy strategy. Both Cennergi and ENERTRAG will contribute skills and project pipelines in realizing our joint ambitions, which will accelerate renewable solutions for our mines and beyond. So furthermore, both companies also have strong presence within the region, and therefore, this partnership helps to support the company’s energy transition strategy.
So overall, it is really imperative to be agile. Whenever market opportunities arise or market opportunities change, looking at how you really want to optimize the balance sheet to service the needs of the business. So we believe that we are well positioned to respond to our national energy crisis as we pursue our growth and shareholder value creation. There will be opportunities that are going to challenge our re-pacing of our energy strategy, and those opportunities we will look at very carefully. But there will also opportunities that come because of market conditions that call for us to re-pace, and that’s the agility we’re talking about. So we believe that this approach is responsible and its value goes beyond just returns, but also to look at the impact directly to the people of South Africa and our economy.
So as the energy transition continues to gather pace, our ability to supply key minerals to support clean energy technologies has become much more urgent. A common theme in copper, bauxite and manganese, our three chosen minerals, is the expectation of insufficient supply in the long-term relative to demand. The Russia-Ukraine war has heightened global geopolitical tensions, resulting in increasing political instability and a higher inflation environment.
Higher borrowing costs and political instability brought about by inflation is certain to further widen the supply deficit of these critical minerals by delaying investment necessary for the growth of additional supply. The bottom line is that the world needs significant investments to be made in these minerals to support the much needed energy transition we’re talking about. And failure to make investments today in preparation for the expected growth in demand for these minerals will threaten that long-term energy security.
Turning your attention to the short-term. The current manganese and bauxite pricing environment is supporting of entry through acquisitions. If you read that with what we said in terms of how we want to look at capital allocation, making sure that we use a robust model to get there, balancing the needs of what we are having to manage in the company to create value for you. And that’s what we’re really talking about here, in looking at this in a very responsible manner.
Although we’ve seen copper pricing reaching about $10,000 per tonne levels, the price has since moderated driven by fears of a global recession. So M&A activity in bauxite and manganese have been relatively muted in comparison with copper, albeit at elevated multiples. We’ve talked about what we see. When we spoke to you in March in terms of what we saw in terms of the copper markets, we’ve made a determination and we continue to look at those M&As.
Despite these short-term market dynamics, the long-term fundamentals, however, of the three chosen commodities remain attractive, and we are focused in pursuing acquisition within these minerals, but as we said, always taking cognizance of our investment criteria, balancing it with obviously our capital allocation requirements to balance risk and returns.
So ladies and gents, in conclusion, we start repeating what we have on the slide. I would like to thank all our employees and the executive team for delivering such solid set of results despite times of deep uncertainty, both in their personal lives and in this business due to logistical challenges, inflationary pressures, load shedding, unnecessary loss of life escalating across the country and community unrest and other disruptions felt in our economy. Whilst we have ambitions for the future, we need to consolidate all the gains we’ve made in the past few years and focus on the key levers to execute our strategy.
Thanks to our Board for always challenging us and the robust conversation we’ve just recently had in supporting our plans to grow this business. We have been listening very carefully to you as our Board Members and everyone that has been talking to us, to our investor community, our stakeholders and employees. And we know that there is a better place to be tomorrow than where we are today. Thank you.
Mzila Isaac Mthenjane
Thank you very much, Nombasa, for those concluding words, very touching, and I think very necessary in these times that we find ourselves in. So we’ve now come to the questions-and-answers. I will start with taking questions from the floor here and then move over to Chorus Call and the webcast.
Shilan welcome. I think we do have a mic. Do we have a roving mic? Is that the only mic we have there? I think somebody is running it — Shilan, I think you’re going to need to show yourself and go to the — it’s really personal. Is there a mic there? We’re making it more personal this year.
Shilan Modi
I prefer being behind the camera, not in front of the camera just so you guys know. A couple of questions from my side. First one is, you mentioned you have alternative channels for exports. Can you talk to what you’re doing there? I think this is kind of related. In your guidance, the other domestic sales for coal is increasing over time. Is that effectively when you sell coal to, let’s call it, marketing businesses and they kind of sell that?
With your investments into, let’s call it, green metals or copper, bauxite, manganese, what are your investment criteria? So what’s your hurdle rates, your WACCs? What sort of quantum or size of acquisitions should we be thinking about? And would this be a solely owned operation or acquisition? Or would it be something like a JV with someone else? Just so we can get an idea of how it fits in the business. Thanks
Mzila Isaac Mthenjane
Thanks, Shilan. Should I take more? Or do you want to answer those?
Nombasa Tsengwa
Answer these first.
Mzila Isaac Mthenjane
Okay. Let’s answer these, and then we’ll go back —
Nombasa Tsengwa
Yes. I think the first one goes to Sakkie. He’s looking the other way, yes. Sorry. And then Kgabi will add. Sure.
Sakkie Swanepoel
Hi, Shilan. Good morning and good to see on this side for a change and not our screen. Yes, so when we say we follow alternative avenues towards the export market, we are really trying every avenue that there is. With TFR performance currently sitting at about 54 million tonnes per annum annualized, we simply cannot just rest on our laurels and hope that our coal will get to markets. So what we are doing is we are tracking coal to other ports. The constraint currently in the export channel is not economics. At this type of coal price, you have quite a few degrees of freedom.
So it’s not economics. It’s not trucking capacity. The constraint is at what rate can you load trucks and where can you get port capacity to go and dump that coal to export it from. So we are pushing coal to other ports than RBCT through trucking. And then we are also selling coal to other players in the market, being producers, traders, anyone with port capacity who has a logistics capacity to take that coal out. We sell that coal to them, and obviously, in the process, try to optimize the pricing. So all of those avenues are pursued.
Mzila Isaac Mthenjane
Okay. And then the follow-up questions on the investment criteria in relation to the Minerals business. Maybe you can split that between yourself and Riaan to add if he wishes.
Kgabi Masia
So [Mushwana] (ph) is a Manager for Business Development for the Minerals team. Welcome, Mushwan.
Unidentified Company Representative
Thank you and good morning. Thanks, Shilan for that question. I think with regard to the criteria, we shared last year in the Capital Makes Day that the type of asset we’ll be looking at. And what we were specific about is from an earnings and from a cash flow generation point of view, we want — or we’re targeting the type of assets that will be — will move the needle. We provided also a target, that, around 2026, we’re targeting around 30% of coal earnings in last year’s terms. So that gives you a sense of size. In our view, this is not a single acquisition that gets us there. It’s a number of acquisitions that we’ll get there.
In terms of the view around whether it’s a sole — an asset where we are the sole owner or JV, we’ve also been specific to say that if it’s the type of asset where we do have — from a capability perspective, we do have strengths and there is a risk that we believe we can manage, we’re more likely to go towards a sole type of ownership. However, if from a risk point of view, we feel that we need to mitigate and we need support from others and we can leverage their capabilities, we may move towards a JV type of environment. But we also recognize that in the world that we live in, these things don’t always work out the way that you want and you always need to have a better flexibility where a partnership may make sense. Yes, I think that covers all the questions. Thanks you.
Mzila Isaac Mthenjane
Thanks.
Pieter Adriaan Koppeschaar
Yes. And then on — I think the other — remember, the capital wheel that we had with the targeted returns, where we indicated on energy it’s an equity IRR of 15% on the portfolio, and then minerals — on the total minerals’ portfolio, WACC x1.5. So that still remains intact.
Mzila Isaac Mthenjane
Thank you. Thabang?
Thabang Thlaku
Hi, good afternonn. And congratulations on the exceptional results. I’m Thabang Thlaku from SBG Securities. So I’ve got a couple of questions. So number one, with regards to Matla and the inefficient way in which you’re receiving CapEx from Eskom, are there any geological challenges to how you recapitalizing that mine simply, because I would imagine it’s not moving efficiently?
And then I have a few questions on Cennergi for Roland. So number one — I guess the first one is for Riaan. Number one, the net debt hasn’t changed much since you guys acquired the other 50% from Tata. Could you please remind us what your debt repayment schedule looks like for Cennergi?
And then the second question is around the fact that with the Lephalale project, you guys will be adding another 80 megawatts, which puts you on 309. Is it not aggressive to assume that you can add another 1.3 gigawatts between, say, 2025 to 2030? Or are there other projects in the renewable space that are running in tandem?
And then my last question. You guys are going to be spending ZAR10.5 billion over the next two years, say, 2023 and 2024 on that 80 megawatts project at Lephalale. Should we assume similar costs for the ramp-up to 1.6 gigawatts? That’s it from my side.
Mzila Isaac Mthenjane
Thank you.
Nombasa Tsengwa
Matla? Do you want to?
Kgabi Masia
On Matla, Thabang, it impacts more operational performance. The geological challenges are at our Mine 2 short-haul. Maybe if I understand your question that is more on operational performance.
Mzila Isaac Mthenjane
Does that answer your question fully Thabang. I struggled to hear the question. Can you ask him to repeat it, maybe?
Thabang Thlaku
What I’m saying is the delays in terms of the CapEx, are there any potential geological challenges that could come about the as a result of that?
Kgabi Masia
Yes. Yes, exactly what you’ve seen with the Mine 2. You end up going into those challenges. Then you start having operational impacts, which can also impact on your costs there.
Nombasa Tsengwa
To add to that. You will recall, Thabang, for a long time, we have really not been able to mine Mine 1, because of that delayed investment on the mine 1 shaft, right, which then meant that we were forced to mine more from two mines, out of sync of the life of mine, which meant that you had to hit some geological challenges. And we’re boxed in those areas because we had no more runway space to go to, especially before your Mine 1 opens up. So definitely, there have been — we have been really pushed to sit into — in conditions, which can be geologically challenging. Even our migration from the wall mining has been really constrained by the fact that we could not develop our sections, which are supposed to add more to the numbers that we have today, because, again, we don’t have that CapEx. So yes, indeed, we do look at current — yes.
Mzila Isaac Mthenjane
Okay. Thanks for that. And then the next question around Cennergi.
Nombasa Tsengwa
LSP, Cennergi.
Pieter Adriaan Koppeschaar
Perhaps, I take quickly. So on Cennergi, the debt — so the debt profile is fixed. There is a schedule on Page 47 in the slide deck. So remember, normally, these project financing arrangements, most of the amortization is towards the back. So initial years, the amortization is slower and then it picks up towards the back. So you — but exactly the same as it always has been. And then Leon can also answer some of the other questions.
Just two points on that. So remember what we always said. On energy, the rule of thumb, whether it’s wind or solar, is it’s $1 million per megawatt. That’s more or less what it costs currently. And then obviously, the growth aspirations with ENERTRAG and stuff, Leon can perhaps give more color on how realistic it is.
Unidentified Company Representative
Good morning, Thabang and —
Mzila Isaac Mthenjane
In the role for Roland whilst he’s on leave.
Unidentified Company Representative
Hi, Thabang and audience. So you ask us what we’re busy with. LSP Phase 1 top and center for us. We’re far advanced. Apart from the NERSA approval that we got, we also got the environmental approval. So that’s good news. So currently engaging with the EPC providers on getting a landing in terms of that job card. Apart from that — so we intend to close earlier next year with construction. We’re running in parallel with that the agreement with ENERTRAG, that got fairly advanced sites that are permitted in Mpumalanga. So we would be working with them to advance that.
And in a portfolio like this, you’re right, to get to 1.5 gigawatts with only development itself is ambitious. So we would also be looking, and we do from time to time, look at inorganic opportunities. If you just look at SA, the shortfall currently is 6 gigawatts. That is before you look over time, growth and decarbonization. So if you look at all of those in the mix, we think it’s a good, safe target for us, but certainly something that we’d be looking to achieve in the foreseeable future.
You asked about the cost. I think what we can say is — and we’re testing this now with LSP as well. These renewable projects lend themselves to high levels of gearing. And we see that as the market matures, the lenders are giving us more funding for this at not too dissimilar quantums and rates than what you see and reap. So from that perspective, it certainly lessens the burden on the equity sponsor in this case. Hope, that answers.
Mzila Isaac Mthenjane
Thanks, Leon. I’m going to move across to Chorus Call, see if there are any questions there. Any questions on Chorus call? Okay. Then I’ll go to the webcast if they are none. And I think for these questions, I would firstly like to invite Sakkie to the mic, because these are marketing questions.
And from Nkateko Mathonsi from Investec as well as Sandile Magagula from Umthombo Wealth. So the first one is around, in terms of the 3.1 million tonnes of export coal for the second half, what proportion of that will go through alternative routes? And then what you expect — the second question, what do you expect the discount to be on API4 in the second half given the 5% that you achieved? And I’ll let you respond to those, and then I’ll come to others from Sandile.
Pieter Adriaan Koppeschaar
Yes. Thanks Mzila. So if we look at the second half, you will see we guide towards 3.1 million tonnes of exports in total. Of that, we expect about 2.5 million tonnes again to go through RBCT and we expect about 500,000 to 600,000 tonnes to go via alternate ports in that effort.
The second question was about the price realization. Coming off a 95% price relation in first half, it’s something that’s not going to be easy to repeat. We have sat with material premiums on RB1 in the first half, which have subsided currently to about $10. At some stages, we were running at $20, $30 premium on API — on RB1 compared to API4. So we’ve witnessed a few things. We’ve witnessed that the premium on RB1 have subsided. The discounts on the subgrades have increased material, where earlier in the year, we were sitting at a discount on RB3 of less than $20, we are sitting now at nearly $80 discount. On RB4, we were sitting at probably $30, $35. We’re sitting currently at $120 discount, on RB4.
So there’s a general oversupply of subgrades in the world, specifically coming from Indonesia, and an undersupply of the high-grade coal, which is why Exxaro is so well positioned in this market for these circumstances. So if we look then towards price realization in the second half, we will see pressure on that price realization because of bigger discounts on the subgrades, because of a lower premium on the RB1. And what will put further pressure on that price realization is that we plan in the second half to push 500,000 to 600,000 tonnes through alternate ports than RBCT. And in those ports, you do attract a lower price than in RBCT because of lower loading rates, more demurrage, all of those factors.
So we expect actually that the price due to those factors will come down. But then we do have — and you see our guidance. We show that we expect to export at least 58% of our product as RB1, compared to 51% in the first half, which means that will help us to improve again. So my estimate at this stage is somewhere between 90% to 95% price realization in the second half, pushing very hard to again get to the 95%. But we do expect some pressure on that one.
Nombasa Tsengwa
Let me just ask. This RB4 you’re telling us about now, what is it? We’re hearing it for the first time.
Pieter Adriaan Koppeschaar
Yes. Sorry, so RB4 — there is a name change — or power station coal has had a name change during the past few months. What we always — what we know in Exxaro in the domestic market as a middling is called type coal. In the international market, we always call that the power station coal. And it’s officially has got a co-specification now called RB4. So in future, you will hear us talk RB4 and not power station coal.
Mzila Isaac Mthenjane
Maybe — sorry. A second before you leave, just for completeness in terms of Sandile’s question — and you may have responded to this. He says, I think given the discount that we received, how much of the impact is driven by purely market dynamics rather than product quality assuming customers are increasingly less worried about the quality now given market tightness?
Pieter Adriaan Koppeschaar
Yes. I do not think customers are less concerned about quality. In fact, what you see in the current type of market — there are certain markets that may buy down in terms of quality, but there is a limit to what you can do, because, operationally, you run into other efficiency problems in your operations if you do that. So what we generally actually see due to the shortage of coal is we get people that actually are buying up into the higher-quality coals also, because of constrained supply chains and shipping. So that for — I really want to say for less logistics movement, you get more CV into your operation. So it is a balanced thing. We do not see a real buying down on that.
And now I’ve talked myself out of your question, can you just repeat the —
Mzila Isaac Mthenjane
I just want to know how much is driven by purely market dynamics rather than only product quality?
Pieter Adriaan Koppeschaar
Yes. So as I indicated, I think there are big market drivers like the discounts and the premiums you achieve. In Exxaro’s case, specifically what we experienced that 95% — and you will see we’ve achieved that 95% price realization on only 51% of RB1 sold in the portfolio, which really is exceptional. And I think what we experienced is a combination of really good price performance by our international team, but also the benefit that we had by selling more coal in the high-priced months, which further skewed our performance positively towards the average of API4. So it’s a mixture of market drivers, but also what you do with your portfolio. And for us, that’s the big focus that we have, is those things that are in our control to drive the market to resource optimization to have that optimal sales mix that you sell at that price point.
Mzila Isaac Mthenjane
Thank you. And then other questions from Sandile relates to Scope 3 emissions, which I think we touched on in Nombasa’s presentation, just in terms of how are we responding to that. And immediately thereafter, asking on Scope 3 emissions. He then says, can we expect the same or more cash earnings in the second half? Which I presume will be from the coal business. And if so, would you consider a share buyback? Yes, those are the two financial questions from Sandile.
Pieter Adriaan Koppeschaar
So the second half, it is going to depend on pricing and price realization, as Sakkie pointed out. So if that can continue under a good cost containment, then the second half will be very good. I think what we — however, we’ll see the second half is SIOC of the dividend, is likely to be lower. Iron ore prices are coming down. So that is also something that we need to consider.
And yes, the — what we always say is we’ve got the capital allocation framework, additional returns to shareholders, whether it is share buybacks or special dividends is something to consider. But that is something I can’t now comment on. It’s a Board prerogative. So the Board will decide whether that comes into effect.
Mzila Isaac Mthenjane
So no doubt the second half depends on the coal gods continuing to smile at us on those bonanza prices and ravenous demand that we receive from the market. So we don’t seem to have any more questions from the webcast. I don’t know if there are any questions on the Chorus Call. I’ll come back to you —
Question-and-Answer Session
Operator
Yes, we do have a question from Brian Morgan of RMB Morgan Stanley.
Mzila Isaac Mthenjane
Hi, Brian. Welcome.
Brian Morgan
Hello. Hi, guys. Two questions from my side. First is on the diversification into copper, manganese, bauxite, have you made any offers, since you came out with that strategy in September last year on any assets? And then on bauxite, particularly, which geographies are you looking to do an acquisition in? And where are you working at the moment?
And then the rescoping of the energy targets from 3 gigawatts to 1.6 gigawatts, a couple of questions there. What’s changed? I’m sorry if I missed it. But how has the strategy changed there? I assume that you’re not going to be spending ZAR15 billion anymore. And presumably also the ZAR6 billion EBITDA number is no longer valid. Can you update us on that, just the thought process around why that’s been re-paced?
Mzila Isaac Mthenjane
Thanks, Brian. So three questions. First one around if we have made any offers on the Minerals acquisition, Mushwana?
Unidentified Company Representative
Good morning, Brian. So in terms of if we have any offers at this point, it’s not something that we’re able to speak to in detail, as you can appreciate. But I think it’s safe to say that we are in the market. We are talking to various players in the market to see if we can — to execute on the strategy that we’ve announced. I think that’s safe to say.
In terms of bauxite and the geographies that we’re in, there’s really 3 main geographies that you can play, of which really 2 are viable. Singapore is one key geography, but it’s not really a geography that we believe we can play in. Then you’re left with Guinea and Australia. And right now, I think Australia, we do see some opportunities that we are looking at. And then in Guinea, we recognize that from a jurisdiction point of view, there are risks. But it’s a geography you cannot ignore given how important the low temperature type of bauxite from there is to the global supply dynamics. So yes. So that’s the answer to your questions, Brian.
Mzila Isaac Mthenjane
Thank you. And then the last question is related to the re-pacing of the energy growth. Those questions?
Pieter Adriaan Koppeschaar
Yes. Sure. Hi, Brian. Good morning. So as Nombasa has explained, there is a re-pacing of the energy strategy driven by all the events that we see. So that includes minerals. That includes the decarbonization. And that includes maybe some challenges on the Transnet side. We also look at the macroeconomic environment. So if you look at the target, it’s still a handsome target that we need to achieve. You ask us how much the guidance is. So previously, the guidance was $1 billion for the 3 gigawatts over the period of time. Effectively, this is about half of that target. So for your modeling, you can use half of that from a capital allocation perspective.
Obviously, the CapEx intensity does change. What we see in the recent past is that — where we saw a steady decrease in capital cost for wind and solar. It’s kind of moved sideways. It’s slightly up in the short to medium term. But we see that trend going at the normal route as time progresses. So from an EBITDA perspective, it’s more or less again in the real term half of that target. But we’ll refine that as time goes along. Obviously, it’s time specific. It’s also dependent on the type of investments you’ll get, how much will be organic, how much of that will be inorganic? Hope that answers the question.
Brian Morgan
Can I just circle back to that, please?
Mzila Isaac Mthenjane
All Right.
Brian Morgan
We’ve seen an improvement in the regulatory environment since September last year. And we’ve also been hit by record load shedding so far this year. I would have thought that, that 3 billion — that 3 gigawatt target would have been increased, not decreased, given what’s changed in the last nine, 10 months?
Pieter Adriaan Koppeschaar
Well, it’s linked to pacing on the one hand. So like Nombasa said, you’ve got to have a lot of wisdom. It’s a nice problem for an organization to have that you have competing asks for capital. So the 3 gigawatts is not off the cards. It’s perhaps a bit longer. What you see in SA Inc. is there’s certainly really good announcements. Those will take time to filter through into the playing field. So on the one hand, all of these things have to be regulated. On the other side, also, you’ve got to look at supply chain.
So typically, what you see in this environment, it takes a bit longer. The supply chain — due to COVID, there’s been certainly a lengthening of the time periods there. Also, you will see some of the costs as well. There’s some cost increases with the minerals forging through. But certainly, there’s enough space in this environment for the target. And over the long term, certainly, we won’t stop at that. So the long term — you don’t stop at a certain point in time. You’ll continue to pursue that.
Nombasa Tsengwa
Can I then add to this? Riaan, if you remember, when we talked to our plan, it was not necessarily looking at bunching investment in one jurisdiction. We were looking at diversifying globally. And the plan would not have been, from a risk perspective as well, to have put — let me say we could do it, which is a good thing. And there’s nothing that says we could not do it in the future. Like I say, we will be responsive to market changes.
But we had said that if we expose ourselves so much to the South African economy, in the same way that we say with customers, with the coal supply, is to try and limit that exposure to a single jurisdiction. Yes, this is a jurisdiction that we understand and we know. But diversification of market is as important as well. But as I say and I’ve said when I’ve delivered, that we’ve got to be agile in responding to what the market is calling for us. And we have prioritized the contribution to the national grid.
There are other players. I think there will be a lot of collaboration in this space. And as I said, if things changes and if things look good, the story that we may tell 2 years from now may be completely different.
Brian Morgan
Okay, thanks.
Mzila Isaac Mthenjane
Thanks, Brian. Any other questions from Chorus Call?
Operator
We have no other questions on the line.
Mzila Isaac Mthenjane
All right. I’ll come back to you, Shilan. Pardon? No, I think there’s a roving microphone. I don’t have to —
Shilan Modi
Thanks, guys. So with the met coal that you produced at GG, are you getting better pricing on the met coal or on your export thermal coal? So does it make sense to blend the met coal with some lower grade coal to potentially sell as thermal? And then going back to these potential acquisitions in green metals, how should we be thinking about the funding? So is there a risk that the base dividend, so the — excluding the SIOC dividend, is there a risk that the main business dividend is reduced while you’re funding this? So you take on debt on the balance sheet, your interest costs go up, and therefore, you need to fund it? I’ll pause there.
Mzila Isaac Mthenjane
Okay, thanks. Great questions. On the met coal, Sakkie, will you take that?
Sakkie Swanepoel
Thanks, Shilan. Yes. So on the Grootegeluk semi-soft coking coal that we export, as you will know, our big markets in South Africa, obviously, is ArcelorMittal and then some of the ferrochrome industry players that buy that from us. Apart from that, we export our semi-soft coking coal as a thermal coal. So I think it’s important to understand Exxaro do not export semi-soft coking coal as a semi-soft coking coal. So what we effectively do is we washdown the ash not to 11% as for a semi-soft coking coal proper, but to a 15% to our RB1 specification. We take that to Grootegeluk or to Richards Bay or toward Everpore, and we there optimize then within the portfolio by blending to come to the right CV for the right price point.
Mzila Isaac Mthenjane
Thanks. And then I think, Riaan, the next one will be ours.
Pieter Adriaan Koppeschaar
So the capital allocation — we previously announced the dividend policy. So there’s at this point in time no reason to deviate from our dividend policy. Our dividend policy at this point in time remains intact, as we previously described. And yes, if we embark on an acquisition, that is also getting capacity in the company. As we sit here, we’re actually in a cash positive position.
Mzila Isaac Mthenjane
Thanks, Shilan, do you have any other — I don’t know if you had any other follow-up questions. It sounded like — okay. I think we can probably press the pause button there. I don’t have any other questions on webcast. Are there any on the Chorus Call?
Operator
We have no further questions on the lines.
Mzila Isaac Mthenjane
Okay. Great. I think then now I can extend an invitation to our Chairman, Mr. Geoff Qhena, if he would like to say a few words.
Mvuleni Geoffery Qhena
Thanks, Mzila. I hope you can hear me loud and clear, because at some stage I battled to hear Brian. But I’m glad you did repeat the questions.
Mzila Isaac Mthenjane
We can hear you and we can see you.
Mvuleni Geoffery Qhena
Mzila, you can hear me loud and clear?
Mzila Isaac Mthenjane
Yes, we can.
Mvuleni Geoffery Qhena
Thank you. You can see me too. Excellent. So let me take this opportunity on behalf of the Board to really thank the new CEO of Exxaro. That happened especially in women’s month, not that it was by — we had planned it well in advance, but it happened so well. And how this transition actually has happened, in a very mature nature. And the results — indeed, the interim results do show that we have a strong team which is producing this.
What we as a board really appreciated is how mature and disciplined management is. Because when times are favorable, people forget the costs. And these results do indeed demonstrate that. And I think Nombasa explained very well where we’re going into the future in slide number 29, which puts everything in perspective. So on behalf of the Board, I would like to congratulate management and we’re indeed comfortable that Exxaro going forward is in safe heads. Naturally, the Board will continue to hold management accountable. But at this stage, I don’t have to have sleepless nights.
The one part which is also very important, it’s worth mentioning, is that it’s not only the profits that we look to make. It’s the communities that define our operations are around and how responsible is the company that we engage with those communities to ensure that we take them along. So on behalf of the Board, Nombasa, well done and you’ve indeed hit the ground running and we will continue to support you going into the future. Thanks.
Mzila Isaac Mthenjane
Thank you very much.
Nombasa Tsengwa
Thank you.
Mzila Isaac Mthenjane
I think for me, it brings it to a beautiful ending. Thank you very much, Chair. A really nice touch there. And I think if I can say thank you very much to everyone who’s joined us here today as well as those who joined us online virtually and for your questions and continued support for Exxaro.
And we — from here on, we will meet with the sell-side analysts for a roundtable discussion at 12. It will be a hybrid. And then that will bring us to the end of the day. Thank you very much. And please enjoy a bite to eat and something to drink outside.
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